Libya's oil output goes from bad to worse

With all the attention being paid to Ukraine, Venezuela and other geopolitical hot spots, energy investors may take their eye off Libya, whose oil production has derailed and may not come back anytime soon.

Libya's struggle to maintain order within its borders is undermining production and taking away a source of high-quality oil blends from aging European refineries.

Mahmud Turkia | AFP | Getty Images

Libyan soldiers stand guard at a gas station in Tripoli late last year. The army was deployed during a fuel shortage in the country.

Production tumbled further over the weekend, to 230,000 barrels a day—compared with 1.4 million barrels just last summer—after renewed protests forced a shutdown at the El Sharara oil field deep in the Murzuq Desert, in the southwestern part of the country.

The field is operated by Akakus Oil Operations, a joint venture of Libya's state-owned NOC, Spain'sRepsol YPF, Austria's OMV and France's Total.

Those problems are on top of disruptions in the east.

"There is a structural political issue with the eastern provinces that is preventing exports from that region, but the government is so weak that it cannot even sustain production in the west of the country," Olivier Jakob, managing director of Swiss research firm PetroMatrix, told CNBC.

In January, an earlier standoff with protesters was claimed to be resolved, bringing some of the dilapidated oil infrastructure back online to produce 500,000 barrels a day. Revenue from oil exports is crucial to the government's budget, and the shortfall has already triggered a series of spending cuts.

At the core of the dispute are demands in the east for greater political autonomy and a larger allocation of the state's oil revenue.

In its February report, the International Energy Agency noted that Libyan production capacity had shrunk to 1.2 million barrels a day from 1.7 million before the 2011 civil war. The most recent data available indicate that more than 75 percent of the oil exported in November went to Europe.

But European appetite for Libya's sweet crude may be dwindling because of the continent's deteriorating refining margins.

"The other side of the equation is demand for Libyan crude," Samir Kasmi, partner at Dubai-based advisory firm CT&F, told CNBC. "The European refineries have been struggling over the last few years, and we will certainly see additional closure of capacity in the next few years."